Company’s liquidity and cash flow: 6 ways to not get yourself into trouble

The cash flows are indicators of a company’s health. Let’s see what the 6 central measures to better manage the cash flows, the Company’s liquidity and prevent corporate crises.

The cash flow now commonly used – are the movements of cash, then money, entering and leaving the enterprise. Generally are measured on a monthly, quarterly or annually.

The cash flows are the main health status indicators of a company, and are crucial especially when it comes to newly established companies. Due to weak cash flows or too uninterested, an entrepreneur in four is forced to close its doors after the first year of operation, while two out of four cannot keep it for more than five years.

But fear not, deeply analyzing the various problems and taking and countermeasures, you can have a more accurate view of the situation of your company and act accordingly.

In this article, we will present some of the most frequent problems and their potential solutions.

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# 1 – How do you manage your accounts?

Did you ever ask yourself: “Why do I work so much but my earnings are so disappointing?”

Hopefully not, but if it is most likely happened is because you have not kept an accurate list of payments received and of those outstanding, or perhaps you have put off the issue of some bills up to forget it altogether.

Many business owners neglect updating and organization of accounting, because they are too busy to handle the productive activities of their company.

If you really think you are too busy to follow also the administrative aspects (and tax) of your business, and you cannot afford to hire someone to do it for you, you can use software that helps you maintain your orderly accounting and updated.

This way, you can check at any time by which customers you’re waiting for payment, and you can get the periodic report of income and expenses to help you understand and more easily monitor the cash flow liquidity of your company.

# 2 – Bad debt

Bad debts are amounts due that cannot be paid by the debtor. For a company just started can be a serious blow, but if you have not set up immediately a company policy to protect you against this risk, sooner or later you will face this kind of situation.

It is essentially to define a set of rules to communicate to potential customers even before starting a relationship with them. This aspect is especially crucial in the case of a start up. Once started a working relationship, you can hardly change “in the running” rules, and indeed cortices the risk of appearing right and go even in the wrong.

The important thing is to act quickly at the first sign. Letting the credit accumulates and reaches ever-greater amounts, the risk that it becomes unreasonable increases exponentially.

Expect a standard formula to send an email reminder, a simple reminder. In the case of agreements that provide for a payment from the client to 60 or 30 days, take example from the insurance company of your car or your internet service provider, which begin to remember the due date 30 days, 15 days, a week before.

If the problem persists, be inflexible and blocks the supply of services or products until you have clarified the situation with the customer insolvent.

If you have some suspicion on the reliability of a potential customer, you can ask for a security deposit or an advance to begin work, or set of balance tranches divided into different steps, perhaps based on the progress of the work. This system, in fact, can be applied to any client, not just those at risk.

# 3 – Go in and out of phase outputs

If the payment terms of your customers are not aligned with those of your supplier’s risk of incurring negative cash flows destined inevitably to worsen over time.

For example, if your customers pay you in 60 days, but your suppliers must be paid within 30 days, you may have to deal with that eventuality.

As already I said, to renegotiate payment terms with customers and suppliers to report already started can put you in a bad light, even if, in cases of cooperation initiated by time and strengthened by a relationship of mutual trust, can be a way forward.

In the absence of these conditions, you can propose a small percentage of discounts for early payment or abbreviated.

As another solution, you can use your bank to request a form of factoring, in order to get cash for your business as they emit bills or notices, or submitting to guarantee contracts and letters of appointment.

# 4 – Non-profit

It goes without saying that lack of profit leads to lack of liquidity. The amount of time that a company takes to be short of cash depends on many factors. In any case, no company can remain without resources for too long.

The companies that can tap into money reserves from previous profits or some financial injection can survive for a while, but long-term losses will have the upper hand anyway.

If your company is losing money, you have to understand what are the causes and address them as soon as possible.

A more careful management of costs, an adjustment of your prices or rates and a policy of promotion and more effective sales can help you improve a situation of this type.

# 5 – Forecast of cash flow

Predict the cash flows of a company is crucial. If your company is fairly structured is an operation that can be conducted internally, or you can contact your accountant or a firm of professionals.

The goal is to predict what time will experience a liquidity deficit and when a surplus. Moreover, you will get a more detailed picture of what your company should earn to stay active.

Comparing the current situation with that assumed by the forecast of cash flow, you will get a lot of interesting data, and in case of discrepancies will be able to take countermeasures.

For example, if it turns out that you’re spending more than you had planned, you can control your consumption and optimize them into electricity. If your phone bill is too high compared to the predictions of that expenditure item, you can intervene trying new offers by other operators.

Update your prediction based on discrepancies found and the solutions used in order to make it more accurate and realistic, and points out that this practice is an important resource to help you make important decisions, such as expenditure cuts and new investments.

# 6 – The more I can chew

It is understandable that you want to increase your business and expand your business, but often a too rapid growth can cause cash flow problems that can damage your business.

Example: You are a small company operating in the IT sector. There comes a customer who wants a big project developed in 12 months. Attractive opportunity for a “quantum leap”, but to follow it and carry it out are forced to hire extra staff, and at some point you get stuck because you cannot afford to pay these people as long as the customer has not paid you.

You are therefore obliged to resort to forms of funding and lending, indentation. When finally the customer has paid you, you can pay your debt to the bank, with interest.

Sure, it may be a risk worth taking, in this work could be followed by others and actually increase your turnover, but assess the situation carefully before making a leap in the dark.

Small and medium enterprises are often faced with such scenarios. The problem is that sometimes do not recognize them, and that’s where the trouble begins.

Taking into account these – other – possibility, and developing the most suitable to maintain positive and regular cash flows solutions, you can ensure your long life and prosperity of enterprise.

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